Monetary policy implementations and inflation relationship: The case of Kyrgyzstan

Inflation which is defined as continuous and significant increase in the general level of prices or a loss of purchasing power of money is an unwanted phenomenon because of economical, social and political negative effects. So nowadays to prevent inflation and maintain price stability became the main target of monetary policy.The purpose of this study is to analyze the dynamics of inflation and monetary policy implementations in Kyrgyz Republic in context of relationship between inflation and monetary policy.Kyrgyz Republic that gained its independence after dissolving of Soviet Union moved towards marked based economy from centrally planned system like other former Soviet countries. In the first period referred to as transition recession Kyrgyz Republic faced a serious economic recession and the inflation level had reached to notably dimensions. Reforms that has realized towards a market economy began to show results after the year 2000 and in this period stable growth and low inflation have reached. However, inflation which increased again in recent years requires analyzing inflation dynamics and implementation of monetary policy.The Central Bank of Kyrgyz Republic (CBKR) divides the factors that lead to inflation into three groups: monetary factors, non-monetary factors and inflation expectations. The Central Bank primarily is trying to deal with the inflation which caused by monetary factors. But mostly inflations are caused by non-monetary factors.Using 2000:01-2011:06 period monthly data and the Engle-Granger two-step cointegration method long-term relationship between inflation and monetary factors were analyzed. According to the results monetary factors explain only a small proportion of inflation and exchange rates are key variables that affect inflation.Keywords: Inflation, Monetary Policy, The Central Bank, Kyrgyzstan